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David M. Kaufmann, CPA
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Note: This is a complicated subject. We will only touch on some topics. We recommend that you talk these issues over with an attorney and a CPA.
How can a trust save on
This is a major point of confusion. Trusts rarely save on income tax. The tax on $50,000 of trust income is much higher than the tax on $50,000 of an individual's income. So why are trusts used? Certain trusts can save on probate costs. Probate comes into play when a person dies. Some trusts can reduce estate taxes (death taxes). Other trusts can keep beneficiaries from burning through money too fast.
Certain types of trusts, revocable living trusts, can be used to avoid probate. When someone dies, the legal and other fees associated with probate can be substantial. Generally, assets in revocable living trusts stay out of probate. One has to compare the potential probate costs against the cost of having an attorney draft a trust. If you are young and healthy, you probably don't need such a trust. However, if you own property in other states, you could be facing probate in all of those states. Thus, if you have significant property in other states, seriously consider a revocable trust. If you are older and have significant assets that should go to relatives instead of attorneys, consider a revocable trust.
No. One document can be used as the revocable trust to avoid probate. The same document can be used to take maximum advantage of estate tax credit.
I do not advise using a "canned trust". Trusts are typically governed by state law. A perfectly good trust for someone in California might have some problems for someone in Colorado.
Only attorneys should draft trusts. A CPA, who isn't also an attorney, could get in hot water by drawing up a trust for a client. Any CPA, who isn't an attorney, that is willing to get himself in trouble by practicing law is most likely to get you in trouble also! If you need some names of lawyers that draft trusts, do not hesitate to contact us. You don't want an attorney that rarely drafts trusts to draft your trust!
On the other hand, you don't want an attorney preparing a trust or estate income tax return (Form 1041). Attorneys usually charge much more for preparing tax returns than CPAs. If you do use a CPA, make sure he or she has lots of experience in this area.
A CPA can prepare trust income tax returns. A CPA can review trust document for tax consequences. A CPA can prepare tax returns for taxpayers that are beneficiaries of trusts. In most cases, a CPA will prepare these returns for much less than what lawyers charge!
The information contained here are simplifications of complex subjects. Trusts can do much more than what is discussed here. Talk to your CPA and attorney if you want to pursue a trust.
If you have questions about this, do not hesitate to contact us at 720-493-4804. We serve clients all over the country. A large portion of my business is preparing tax returns and tax planning for trusts, estates and beneficiaries of trusts and estates.